Question
Distinguish between straight line method and written down value method of calculating depreciation.
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Answer
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Basis of Difference
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Straight Line Method
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Written Down Value Method
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Basis for calculation
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Depreciation is calculated on the original cost of an asset.
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Depreciation is calculated on the reducing balance, i.e., the book value of an asset.
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Amount of depreciation
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Equal amount is charged each year over the effective life of the asset.
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Diminishing amount of depreciation (on the written down value of asset) is charged each year over the effective life of the asset.
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Book value of asset
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Book value of the asset becomes zero at the end of its effective life.
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Book value of the asset can never be zero.
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Suitability
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It is suitable for the assets like patents, copyright, land and buildings, etc., which have lesser possibility of obsolescence and lesser repair charges.
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It is suitable for assets that needs more repair in the later years like, plant and machinery, car, etc.
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Effect of depreciation and repair on profit and loss account
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Unequal effect over the life of the asset, as depreciation remains same over the years but repair cost increases in the later years.
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Equal effect over the life of the asset, as depreciation cost is high and repairs are less in the initial years but in the latter years the repair costs increase and depreciation cost decreases.
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Recognition under Income Tax Act
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It is not recognised under the income tax act.
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It is recognised under the income tax act.
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